Choosing Expense Reimbursement Methods for Nonprofits
By Ariana Warren, CPA, Senior Manager, Tax & Business Services
This is in an interesting moment in time for employers. The effects of the “Great Resignation” are omnipresent and impede employers’ ability to retain employees or attract C-suite executives, many of whom have endless options available to them.
To stay competitive nonprofits continue to adapt, and in some instances lead, in creating new types of fringe benefits and employment enticements. It is increasingly commonplace for nonprofit organizations to offer enticements such as housing and car allowances, health and social club dues, maid or chauffeur services, meals, and of course, travel. The employer’s decision in how they will reimburse employees, impacts proper tax reporting and can change taxable income liabilities.
Let’s consider the three reimbursement methodologies and their implications. The methods are:
- An accountable plan;
- A nonaccountable plan; and
- A non-reimbursement plan.
Under an accountable plan, business expenses incurred by the employee must be adequately accounted for. These expenses must have been incurred while performing services for the employer, they must be reported within a reasonable amount of time, and any excess provided to the employee must be returned to the employer. Properly accounting for business expenses involves receipts or other documentation to support the incurred amount, similar to the way your personal tax return is supported. In Publication 535, the IRS defines a reasonable time period as 60 days. And of course, excess includes all amounts that exceed the balance of expenses incurred.
Under a nonaccountable plan, the organization does not have to adequately account for expenses, and employees are not required to return excess. Therefore, there is no documentation explaining the purpose or type of expense incurred. A non-reimbursement plan is similar to a nonaccountable plan, but instead of being reimbursed, the employee is provided an allowance or an advance. With either of these plans, all amounts provided to the employee are taxable and the entire amount is reported as wages on Form W-2, within Box 1. When we lack documentation, all funds become taxable.
But what happens when we have a more hybrid situation before us, rather than an all-or-nothing scenario? We can simplify our approach to understanding the taxable treatment if we follow some rules of thumb. When we have adequate supporting documentation, none of the amount is taxable income to the employee. If there are excess amounts provided to the employee that are not returned to the employer, this is income to the employee and gets reported in Box 1 of Form W-2. Amounts that are incurred for per diem up to the federal rate (confirm per diem rates here) are excluded from taxable income. If these federal amounts include components with excess, the excess will be reported in Box 1, with the federally allowed amount separately stated within Box 12.
Before reimbursements are made, it is imperative that nonprofits recognize the differences between plan options and how they impact taxable income. It is always better to be deliberate in your approach and understanding before making a transaction. Doing so improves transparency and minimizes uncertainty about the nature of reimbursements and compensation.